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Traveling by land into India from Pakistan across one of the world’s most militarized borders isn’t easy on a normal day. Doing so with $120,000 worth of gold stuffed in your underwear is even harder.

A group of 12 Indians and Pakistanis were caught doing just that in October on a train that passes between the South Asian countries once a week. Basant Garhwal, the Indian customs officer who oversaw the raid, said the 2.8 kilogram haul was the biggest seizure yet on the route.

“We used to hear every day about gold being caught at airports,” Garhwal, 34, said by phone from the western state of Rajasthan, where he’s assistant commissioner of customs. “Now they are applying this to trains, and that is why we worry,” he said, referring to smuggling rackets.

India’s move to ease gold import restrictions imposed last year may ease smuggling that prompted seizures to rise fivefold in the world’s second-largest consumer. That left currency traders wondering just how many dollars were leaving the country unrecorded to pay for the smuggled gold, potentially making the rupee appear more valuable.

“The restrictions were causing some distortions,” Jason Daw, head of Asian foreign-exchange strategy at Societe Generale SA, said by phone from Singapore today. “The curbs had shrunk the current-account deficit and were clearly supporting the rupee, while some of that gold could be coming in through other ways” and draining the economy of dollars, he said.

Weakened currency

While the rupee won’t be affected much by the easing in the short term due to lower oil prices and an improving current account balance, “medium term risks have increased,” Daw said. The authorities could reimpose the curbs if the rupee drops next year, he said.

The currency has depreciated more than 5 percent since the government permitted more gold importers on May 21. It closed last week at 62.03 per dollar, the weakest since March.

India’s central bank last week scrapped a requirement for trading companies to export 20 percent of imported gold. Known as the 80:20 rule, it was part of a series of curbs imposed over the past two years to contain the current-account deficit, which hit a record $88 billion in the fiscal year through March 2013.

Other restrictions on gold imports remain in place, including a 10 percent tax. That’s double the rate of neighboring Pakistan, fueling a surge in smuggling.

Gold formed a quarter of the goods seized by India’s Directorate of Revenue Intelligence in the year through March 2014, up from 1 percent in 2012.

‘Guessing game’

“Since there is no official data on smuggling, it’s a bit of a guessing game,” said Vikas Babu, a foreign-exchange trader at state-run Andhra Bank Ltd. in Mumbai. “The curbs were meant to contain imports. Any easing will widen the deficit and weaken the rupee.”

The current-account gap fell to $32 billion in the year through March 2014. While the shortfall is forecast to widen this year, the Reserve Bank of India predicts it will stay within the 2.5 percent of gross domestic product that it considers sustainable.

Gold inflows through “alternative channels” may have prompted the RBI to scrap the so-called 80:20 rule, Madhavi Arora, an economist at Kotak Mahindra Bank Ltd. in Mumbai, said by e-mail. If gold imports surge, than authorities may consider capping the total quantity of incoming shipments, she said.

“Demand can suddenly pick up through official channels,” Arora wrote. “Thus, we will have to wait and see if this relaxation is a precursor for any other stringent restrictions on gold imports.”

Gold fascination

Indians have long had a fascination with gold, with historians saying that numerous foreign invasions since the 13th century probably encouraged purchases of the metal as a store of value. The Gold Control Act of 1968, which limited private holdings, led to rampant illegal shipments before culminating in a balance-of-payments crisis in 1991 that forced the government to pawn its gold for an International Monetary Fund loan.

In more recent years, one of Asia’s fastest inflation rates has contributed to the lure of the precious metal. Gold returned about 17 percent to investors between 2001 and 2013, second only to the 19 percent earned on real estate while stocks and bank deposits offered as much as 11 percent, according to consultant A.T. Kearney Inc.

Batteries, bangles

Over the past few months, illegal shipments have come in various forms: disguised as plastic bangles, melted into phone batteries, stuffed inside rectums.

More sophisticated scanners and increased personnel at a new airport terminal in Mumbai has brought the number of seizures down even as individual hauls are getting larger, said Kiran Kumar Karlapu, an assistant commissioner of customs.

He and his team confiscated 85 kilograms of the metal in October, down from 120 in August. His colleagues hauled 10 kilograms off a ship in the eastern coast.

Garhwal, who mans the India-Pakistan border, said penalties aren’t strong enough to deter gold smugglers. Offenders can get bail as long as the value is less than 10 million rupees.